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Economic Brief - Blending grants and loans for private sector development: The use of grant elements and the AfDB’s experience

23-Sep-2010

Grant elements in private sector operations are an integral part of the toolkit used by Development Finance Institutions (DFIs) for supporting private sector development. Going beyond the existing literature on grants vs. loans, this brief delves into the conditions under which grant elements should be used in private sector operations by DFIs. In particular, it seeks to (i) a clarify the use of grant elements in private sector lending, (ii) enumerate a number of criteria that should guide the selection and design of operations in cases where grant elements are involved, and (iii) undertake a short evaluation of selected AfDB projects against the defined criteria.

Results suggest that blended grant/loan finance should be subject to careful analysis in order to fully gauge the extent to which grants are needed. Emphasis is put on whether the use of grants can have market-disruptive rather than intended market-fixing effects. In this regard, six criteria are brought out to provide a check list against which the use of grant elements should be tested. Based on these, the selected AfDB projects show consistency, yet their review brings out the need for an even more robust and detailed assessment framework.

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